7 Investor Mistakes You Should Avoid

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By Mark Jewell

BOSTON (AP) — So is it time to get back in?

Investors left anxious after the stock market's wild ride over the last year have reason to be a bit more confident. Volatility has eased and the Standard & Poor's 500 index is up more than one-third from the depths it sank to in early March.

But be careful. It's easy for investors to trip up in good times and bad. And potential pitfalls have emerged amid the market's turnaround.

For starters, don't presume the recent gains will continue uninterrupted.

"Nobody expects to go straight up from here," said Greg Pinto, a certified financial planner with Boston-based Baystate Financial Services.

Here are seven mistakes individual investors should be careful to avoid in the current market:

1. TRYING TO TIME THE MARKET: You hear it from financial planners and even investment pros all the time: Don't presume to have the psychic ability to know where the market is headed. The inclination to follow the herd by selling as the market tanks and buying back in after a recovery starts can be especially damaging. A study by the Boston-based consulting firm Dalbar Inc. found that a buy-and-hold investor who put $10,000 into an S&P 500 index mutual fund in January 1989 would have ended up with nearly $50,000 by the end of 2008, had they not made any changes expect for annual rebalancing. But an investor who darted in and out during rallies and slumps over that same 20-year period would have seen that $10,000 grow to less than $14,500.

2. CLINGING TO UNREALISTIC EXPECTATIONS: Investors accustomed to seeing blue-chip stocks retain most of their value have been stunned over the last year. For example, General Electric Co.'s stock sank below $6 in March of this year, some 80 percent off of its 52-week high of $31. GE stock has lately traded between $13 and $14. Investors used to seeing such stocks trade at much higher prices might be inclined to think they'll eventually return to their old levels. Not necessarily. Sometimes, a company's long-term prospects simply are no longer what they once were. The same can be true for the broader market: Just because the S&P 500 topped 1,500 a couple years ago doesn't mean it will reach those dizzying heights again anytime soon.

"A lot of people are excited by the notion that they can get pick up shares of these household names very cheaply, thinking they can hit a home run," said Mark Passacantando, of Financial Planning Partners LLC in Westwood, Mass. "But the market is so complex, it would be a mistake to look at current prices versus previous prices."

3. LETTING YOUR PORTFOLIO GET OUT OF BALANCE: When markets are in turmoil, review your mix of stocks and bonds more frequently. The market is still trying to find its way, and the asset mix that may have been appropriate for you a year or two ago may no longer be a good fit. Many studies show that choosing the right mix among asset categories such as stocks and bonds has a far greater effect on long-term returns than your choices about which individual stock or mutual fund to buy.


4. STICKING WITH THE SAME OLD STRATEGY: The market's meltdown last year boosted interest in alternative investments that often behave independently of the markets, and can help limit volatility. Think of such investments as gold, which tends to hold value when other investments lose favor, or commodities such as oil. Real estate also can offer a buffer against some market downturns. "You've got to widen your investment universe," said Clifford Caplan, of Norwood, Mass.-based Neponset Valley Financial Partners, who primarily advises wealthy clients.

5. IGNORING INFLATION: The federal government is pouring more money into the financial system and keeping interest rates at historic lows to restore credit markets and prop up the economy. While those steps may be working short-term, they also will boost the government's deficit, and could encourage long-term inflation. Such fears have fueled the recent popularity of Treasury inflation-protected securities, investments on which the principal increases with inflation.

6. FAILING TO MAINTAIN A FINANCIAL CUSHION:
Some investors may be so eager to snap up stocks that they neglect to keep enough cash to ride out an emergency. If you've put money into a retirement account and then suddenly need it back, you could pay a hefty early withdrawal fee as well as taking a tax hit. Many financial planners suggest emergency funds should cover at least three to six months of expenses, depending on your profession and the likelihood that you'll be out of work for an extended time.

7. NOT KNOWING WHEN TO BAIL: If you ease back into the market, be prepared for the possibility that the recent recovery will run out of gas. Devise a strategy to ease your exposure if the market appears set to take another slide.

Pinto advises many individual investors may wish to sell a stock or a mutual fund if it falls 7 percent below the purchase price, to guard against even greater losses. You may be able to write off the loss as a deduction to reduce your tax bill.

"Don't be afraid of getting rid of your losers," Pinto said. "Some companies may never recover, and others might take years and even decades to recover."

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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